With multiple demands on limited resources, managing personal and business finances for farming families is always a balancing act. When you have debt or equipment that needs to be replaced, how do you prioritise putting any excess funds away into super?
But if you want to have a tax free efficient income in retirement, you need to understand how much you will need for your retirement and put strategies in place to build your retirement savings. Unless you act NOW, you could miss out on opportunities to reduce your tax before June 30.
To be able to prioritise your superannuation, you need to consider your retirement plans as part of your overall succession planning from the farming business. Running an inter-generational family business comes with complexity but without a well-planned succession plan, including strategies to fund your retirement, you could leave financial and tax complications for your family.
How much super do you need?
When it comes to planning for retirement everyone’s needs will be different, however as a guide, the AFSA Retirement Standard benchmarks the estimated amount to fund a ‘comfortable’ or ‘modest’ standard of living in retirement.
AFSA Retirement Standard Budget Overview* [1]
*A modest retirement considers only being able to afford basic activities, whereas a comfortable retirement includes a higher standard of living and ability to purchase private health insurance, a reasonable car, good clothes and travel. Both standards assume that retirees own their home outright and are relatively healthy.
What you need to know about super
It’s important to put these figures into perspective – you will need approximately $1.2 million in super to return an income of $60,000 per annum (at a 5% return). There are limits on how much you can contribute each year, so it’s important to start early.
- Superannuation is one of the most tax-effective retirement options, with each individual allowed to have $1.6 million in super funds to provide a tax-free income stream.
- Concessional contributions (pre-tax) are capped at $25,000 per annum.
- Non-concessional contributions (after-tax) are capped at $100,000 per annum (or $300,000 using the bring-forward rule).
Super actions to talk about before June 30
#1 Boost your super with pre-tax contributions – you can contribute up to $25,000 in pre-tax or concessional contributions each year. This amount includes any Super Guarantee contributions or salary sacrifice arrangements from any paid off-farm work.
#2 Make hay while the sun shines – If the seasons have been good for you, you could consider making additional after-tax or non-concessional contributions to super. It may also be appropriate to set aside pre-tax income if you are involved in the Farm Management Deposit (FMD) Scheme. Deposits to the FMD Scheme are also tax deductible.
#3 Contribute to your spouse’s super – If your spouse’s income is less than $10,800 per annum, you can receive a tax offset of up to $540 by making a $3,000 contribution to their super fund.
#4 Make employee super contributions – If you have paid employees, you are obligated to pay Superannuation Guarantee contributions of 9.5%. For payments made to be tax deductible for this year they will need to be processed by the super fund before June 30, and some super funds have cut-off dates or are subject to time restraints of clearing houses.
#5 Use your super to pay for personal insurances – Holding and paying for insurances such as Life Insurance or Total and Permanent Disability Insurance, means you can use your superannuation assets to pay for your premiums, which can help improve your cash flow. However it’s important to note that having an insurance policy does not mean you are adequately insured, so it’s vital to seek advice to understand if cover is appropriate for your circumstances.
Important information about super: Concessional contributions include your employer’s 9.5% contribution and contributions are taxed at 15% (or 30% for income earners with an income over $250,000). If you exceed the concessional contributions or non-concessional contributions cap, penalties will apply. All contributions to super are preserved until you meet a condition of release, such as retirement.
Why is planning super so important for farming families?
When you have an inter-generational farming business, it’s not as simple as viewing the sale of the farm as your retirement plan. Not only do you have your family members to consider, but you also need to consider longer term issues such as asset protection and tax-effective ways to structure ownership to benefit family members across multiple generations and business interests.
There are many strategies available for family farming businesses when it comes to super, including a self-managed super fund (SMSF), so it’s essential to seek advice for your specific circumstances and financial goals. It’s also important to note that a Will usually only covers your personal assets, and when it comes to super, generally the Trustee of the super fund (Industry, corporate, retail fund or SMSF) has the discretion to distribute your super as they see fit. There are strategies you can implement so your super will be distributed according to your wishes. Some dependants are treated differently from a tax perspective, so it’s important to seek advice from a tax specialist to understand the tax implications.
How we can help
If you would like to discuss your superannuation strategy or succession planning needs, I encourage you to contact me today on 08 8253 2906 or email info@financialservicessa.com.au to arrange an appointment.
Phillip Dibben is a financial adviser with Active Financial Management. Active Financial Management and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
This information does not consider your personal circumstances (including taxation) and is of a general nature only. You should not act on the information provided without first obtaining advice specific to your circumstances.